The Economist reports that housing in China is “cheaper than you think.” The magazine-that-calls-itself-a-newspaper’s measure of affordability is the average price of a 100-square-meter (1,076-square-foot) home divided by average household income.
In megacities such as Beijing and Shanghai, such a house costs nearly 15 times the average incomes of those cities. Not to worry, says the Economist: in medium and small cities, housing is only about 8 times average incomes. As of November, the national average is 8.9 times.
Even the British Economist should recognize that such prices are hardly affordable. Britain is one of the least-affordable nations in the world, yet Wendell Cox’s latest assessment of housing affordability finds that median homes in London, one of Britain’s least-affordable cities, are 7.3 times median incomes. The nationwide average is 4.7 times incomes.
Note that Cox uses a different definition of affordability than the Economist, basing it on the price of a median home rather than a 100-square meter home. As it happens, the average home size in Britain is 85 square meters, so (assuming prices are proportional to house sizes), a 100-square-meter home in London would be 8.5 times median incomes, while the average such home throughout the U.K. would be 5.5 times median incomes.
In other words, if compared with London, the average home in China sounds almost affordable. But London is the wrong comparison with China; the correct comparison would be Beijing, where a 100-square-meter home would cost about twice as much (relative to average incomes) as one in London. Or the correct comparison would be China as a whole with Britain as a whole, where again China appears far less affordable.
My point is, however, that the Economist‘s view is skewed by Britain’s unaffordable housing. In the United States, many housing markets have median homes between 2 and 3 times median household incomes. Moreover, the median home in the United States is roughly twice as big as the median in Britain, which means it is nearly twice as big as the Economist‘s 100-square-meter home. The price of a 100-square-meter home in the U.S. would average well under twice median household incomes.
Both the Economist and Cox use median household incomes as their income standards, whereas the Antiplanner uses median family incomes. (A household consists of any people living together; families must be related–all families living together are households but not all households are families.) Since family incomes tend to be higher than the incomes of non-family households, Cox reports value-to-income ratios that are somewhat higher than my own. It doesn’t change the ranking much, but it does change the overall numbers. For example, the median home price in the Houston urban area is 3.3 times median household incomes but only 2.2 times median family incomes. I normally argue that home prices more than three times family incomes are a sign of supply constraints, while the threshold for household incomes would be about four times.
In any case, any nation whose homes cost an average of 8.9 times household incomes does not have affordable housing. Of course, the likely response in China is that most people live in homes much smaller than 100 square meters. Indeed, the average size of a new home in urban China is just 60 square meters, but that has more than doubled in the last 15 years, showing most people in China, as elsewhere, would rather have a larger home.
China has more people than the United States, and China’s population density is almost 4.5 times greater than that of the U.S. But the population density of the Netherlands is nearly three times as great as China’s, yet the average size home in the Netherlands is bordering on 100 square meters, and new homes are nearly twice as big as new homes in urban China. Cox doesn’t include the Netherlands in his annual report, but another study found that housing in the Netherlands is slightly more affordable than in Britain.
The important question that the Economist doesn’t address is: Why is Chinese housing so expensive? One possible answer is that transportation is poor and so most urbanites have to live in crowded areas where land prices are high to have access to jobs and consumer goods. Of course, China has plenty of mass transit, so if this explanation is correct, it suggests that a transit-dependent society has to spend a lot more of its income on housing than an auto-liberated society.
The other possible answer is that land-use restrictions prevent people from living in less-expensive areas. Given a choice between high-rise and low-rise housing, most people regardless of nation or culture choose low-rise. Yet photographs of “urban sprawl” in China show lots of high-rise housing, which suggests that the government remains heavily involved in housing markets. I haven’t studied Chinese housing markets in detail, but I strongly suspect that China’s lack of affordability is related in some way to government control or regulation.
The good news, says the Economist, is that housing affordability is increasing everywhere in China, with the cost of a 100-square-meter home having declined from 12 to 9 times household incomes since early 2010. But rapid changes in housing prices and affordability are themselves symptoms of restricted housing markets. If restrictions prevent home builders from meeting demand, changes in demand will result more in large fluctuations in prices than in changes in housing supply.
Regardless of the cause, there is little about China’s housing market to be cheerful about. The Economist should have taken a harder look.